Featured Articles

Don’t Underdo Due Diligence

By David Silverburg, CEO/President, First Corporate Solutions

Appeared in Illinois Bankers Magazine

If you’ve ever loaned a few dollars to an in-law, friend or teenage child, only to find out that reimbursing you was anything but that person’s top priority, you already understand the major challenge faced by professional lenders: securing a position for payback.

Banks and other commercial lenders lend money in the hope of not only recouping their investments but also, quite naturally, of realizing a profit. Many of these professionals tend to assume that, based upon the amount of money they’re lending and the research they’ve done on the borrower, they’ll be high on the to-do list for repayment.

But sometimes, particularly in a tight economy, when interest rate hikes aren’t predictable, promissory notes can be deceptive. Even when lenders feel they’ve done all the due diligence imaginable to calculate their risks, they sometimes come up short by doing incomplete searches of a borrower’s fiscal history.

Put simply, today is no time to under do your due diligence. Here are a few suggestions — which you’re free to consider as a report from the front lines of the back office — that lenders may want to consider and borrowers ought to be aware of:

1. Before you lend money, do you conduct not only a certified search but also an uncertified one? While the first type sounds more complete and the second may sound vaguely illegitimate, it’s the uncertified search that can sometimes make red flags pop up because it digs down deeper and seeks a much broader range of information. The best thing to do might be to start with the uncertified search to expand the boundaries of your quest, and then follow that with a certified search, to establish the necessary paperwork if required. The type of searches you should consider include but are not limited to state and federal tax liens, UCCs, pending suits, judgments and bankruptcy searches.

2. Remember that sometimes federal and state tax liens and judgments against your borrower might not be available from the state index you expect! For example, in Illinois they are located in their own, separate state index. Did you know only seven states include both federal tax liens for individuals and organizations at the state level? Lenders might assume they’re receiving four kinds of data from their search firm — documentation related to the Uniform Commercial Code, federal tax liens, state tax liens and abstracts (legal summaries) of judgments against the borrower — but, in fact, that depends upon the state in question and the sort of data that state maintains in its filing office.

3. Do a broad enough search to make sure even though you’re in first position to be repaid, your friends at the Internal Revenue Service can’t leapfrog your claim. The IRS files against the taxpayer’s name and slight differences that may seem insignificant prevent liens from being found, such as omitting punctuation or a space. Some search engines allow broad based, truncated name searching: by inputting less you get more. The capability to use wild cards is also recommended so you can retrieve different spellings of the same name, for example Peterson and Petersen.

4. Make sure you’re looking at the articles of incorporation to ensure you are searching the correct name for UCC filings! If the filing was filed with an incorrect name or spelling, it is not perfected.

5. Monitor index dates or qualify your service provider so you know exactly how current the information is. Some service providers strictly offer or use on-line search systems. Depending on the jurisdiction, this may not be the most current index through date, nor the best practice in obtaining up to date information. You might consider using a vendor that uses a blend of both online and manual searching that ensures you are getting the most up to date information in each jurisdiction.

6. Consider a comprehensive account monitoring program that searches at the state and county level for federal tax liens on a monthly basis.

There are many choices out there with varying costs in accomplishing your due diligence. Use a service that understands your business, your needs and who is committed to finding the best solutions for you that minimize your risks.

The Who, Where and What of Due Diligence

By Kacy Flowers

Appeared in Illinois Bankers Magazine April 2009

Can you hear it? It is the sound of millions of Americans simultaneously tightening their belts. Across the nation, people are critically evaluating their spending practices and making dramatic cuts in their household budgets. Given the uncertainty of today’s economy, American families are wise to slash their spending. The legal community however, should be cautious where they make cuts and think twice before cutting too deeply from their due diligence budgets. Knowing the who, where and what of due diligence searching can ensure you are getting the most value for your due diligence dollar.

The Who

Searching for the right party is imperative when coordinating due diligence search efforts. This may seem simple, but keep in mind that liens could be filed under business names, individual names, aliases or nicknames, even fictitious business names. So, how can you be sure you are searching for the right name?

Here are a few pointers to get you on the right track:

1. Check corporate records to determine the exact legal name before performing liens searches on a business.
2. Utilize online search systems that allow for broad-based name searching to reveal name variations.
3. Be mindful of jurisdictions where exact name or Revised Article 9 search logic is employed. Searches performed in these jurisdictions will not include any similar names on your search result.

The Where

Equally important as searching for the right name is searching the right place. In order to be certain you’re getting the results you think you are; searches must be performed for the right records at the appropriate filing office.

Here are some tips to help determine where to search:

1. Revised Article 9 sets forth that UCC Financing Statements filed against businesses are to be filed in the state of organization. UCCs filed against individuals must be filed in their state of residence.
2. To uncover liens relating to collateral that is affixed to real property, be sure to search for fixture filings at the county level. Fixtures are to be filed in the county where the collateral is located.
3. In many jurisdictions, tax liens can be filed with either the state or the county. An exhaustive tax lien search in these jurisdictions will include a search of both state and county filing offices.
4. Tax lien records are often maintained on a separate index at state filing offices. A UCC only search in these states will not reveal tax liens of record.

The What

It is advisable that you carefully consider what searches to perform to best mitigate your clients’ risk for loss. That being said, the following due diligence search package provides for comprehensive reporting of existing financial obligations and encumbrances in the public record:

• UCCs (and available tax liens or judgments) at the state level
• UCCs/fixture filings, tax liens and judgments at the county level
• Civil litigation at the state court of general jurisdiction
• Civil litigation at the U.S. District Court
• Bankruptcy at the U.S. Bankruptcy Court

Thorough due diligence searching can help lenders make funding decisions with confidence. There are several innovative portfolio management tools available to preserve that peace of mind. A UCC tracking program will identify filings are set to expire so you can prepare timely continuations and maintain priority position. Further, monthly account monitoring programs will alert you to federal tax liens and other critical filings that may jeopardize your ability to collect on debts.

In tough economic times, getting the most for your money is crucial. By familiarizing yourself with the who, where and what of public records research you can rest assured your money has been wisely spent.